FACEBOOK INKS ITS BIGGEST DEAL EVER; NEUTRALIZES THREAT POISED BY INSTAGRAM, THE NO 1 PHOTOSHARING STARTUP, AND GIVES FACEBOOK A STRONG ENTRY INTO THE MOBILE MARKET
In October 2010, Stanford University graduates Kevin Systrom and Mike Krieger launched a new iPhone application, Instagram, yet another oddly named tech start-up in a crowded field of hopefuls.
Facebook has just announced they will be purchasing Instagram, the popular photo-sharing app, for roughly $1 billion. CNET Editor-At-Large Rafe Needleman discusses what both companies stand to benefit from the partnership. CLICK IMAGE TO VIEW VIDEO
On Monday, the two twenty-somethings said they sold their photo-sharing service—which has about a dozen employees and no revenue—to Facebook Inc. for $1 billion in cash and stock.
That 18-month journey underscores the frenzied state of the tech investing game, where even the smallest Web companies can develop global followings in a matter of weeks.
Only last week, Instagram closed a $50 million funding round from venture capital firms. The company's valuation: A whopping $500 million.
Incredibly, such a number would turn out to be paltry in the days ahead. Shortly after that deal, Facebook Chief Executive Mark Zuckerberg contacted Mr. Systrom, Instagram's 28-year-old CEO, to buy the company.
Mr. Systrom came up with the idea for Instagram and is the company's largest shareholder with about a 45% stake, said people familiar with the matter.
The two had spoken about a deal the previous summer, according to other people familiar with the matter.
The acquisition came together over the weekend. Steve Anderson, a founding partner of Baseline Ventures, one of the company's early investors said.
"It was all Mark. It was CEO to CEO."
Buying Instagram improves Facebook's mobile offerings while removing a rival for users' attention. Instagram, with more than 30 million registered users, grew rapidly by helping people share photos, a fundamental reason people use Facebook.
The deal is the largest ever for Facebook, which people familiar with the matter say will sell shares to the public in May. The company in the past has paid millions of dollars for a series of small ventures, primarily in an effort to acquire talent.
Mr. Zuckerberg called the deal a "milestone" for his company. But, he said,
"We don't plan on doing many more of these, if any at all."
Instagram is one of a cohort of young start-ups that have built products around the iPhone and have registered incredibly fast growth in a short period of time. The company bills its service as a fun and quirky way to share photos with friends. A user can snap a photo with an iPhone, then choose a filter to transform the look of the shot, say by giving it the look of an old Polaroid.
Users can share the photos with followers, where they can post comments and "Like" recommendations. Some people describe the app as a visual version of Twitter, where it is heavily used to share photos.
On March 11, Mr. Systrom gave a keynote talk at the South by Southwest conference in Austin and announced that Instagram's count of registered users had nearly doubled since December, rising to 27 million from 15 million. Last week, the company launched a version of its application that works on smartphones running Google's Android system and instantly added millions of users.
All this growth hasn't yet translated to revenue. But in the lingua franca of today's social-media industry that doesn't matter as much as user engagement and the ability to access those users' personal data.
Facebook has about 845 million users, many of whom came to the service to share photos. The company has been falling behind in mobile and has let Instagram capture much of the buzz in photo sharing. The company has rarely changed its photo feature, even as newer companies built more sophisticated apps.
Photos are a key driver of user "engagement," or how long someone spends on Facebook. Users spend an average of 7.5 hours a month on the site, according to research firm ComScore, the highest of any social network.
Those numbers matter to Facebook's marketers, who want users to view advertisements and interact with brands on the site. Advertising accounts for 85% of Facebook's revenue, or $3.1 billion in 2011, up from $1.8 billion a year earlier, according to the company's regulatory filings.
But the company has to capitalize on mobile. It only begun in February to sell limited advertising on its mobile site, despite the fact that about half of its membership uses Facebook on their mobile phones.
Instagram has yet to develop a model for generating revenue, and substantial obstacles remain, such as whether small smartphone screens are sufficient to draw advertisers' attention.
Ann Taylor owner Ann Inc. and fashion label Marc Jacobs have created accounts and use Instagram to promote their brands. The app is also popular with celebrities and politicians who have created accounts, including singer Justin Bieber, President Barack Obama, professional skateboarder Tony Hawk and rapper Snoop Dogg. Last year, Apple named Instagram the iPhone app of the year.
The Instagram deal harkens back to Google's $1.6 billion acquisition of video-sharing site YouTube in 2006. At the time, analysts questioned the hefty price tag. But the deal instantly made Google a leader in Internet video and allowed it to expand its advertising to new formats.
In early 2011, Instagram raised $7 million in venture capital from Benchmark Capital, Baseline Ventures, Lowercase Capital and a handful of early-stage investors in a round that valued the company at about $30 million, said people familiar with the matter.
The new company almost immediately drew interest from suitors.
Twitter reached out to the company to express interest in buying it in 2011, people familiar with the matter said. Last summer, Mr. Systrom took a meeting with Mr. Zuckerberg, who floated the idea of a sale to Facebook, the people said.
Messrs. Systrom and Kreiger rebuffed all of the offers and seemed intent on building an independent company, said people familiar with their thinking.
Mr. Zuckerberg convinced Mr. Systrom that Instragram would be stronger under the Facebook umbrella than operating as an independent player.
He told Mr. Systrom that Instragram would function as an independent company under Facebook—a promise that Mr. Zuckerberg had never made to any other acquisition targets.
COMMENTARY: Facebook lags behind in mobile, and acquiring Instagram and its nearly 30 million users is a huge coop. I'm really surprised that Google did not grab Instagram earlier and spoiled Facebook's thunder. The acquisition adds a huge feather in the "Boy CEO" Mark Zuckerberg whose executive experience to lead a multi-billion company has been questioned, including yours truly. The acquisition gives Facebook something to brag about on the eve of its forthcoming IPO in May. This acquisition is worth at least a 5-to-10 point boost in Facebook's share price when it goes public.
The announcement that Facebook acquired Instagram created waves, to say the least. Facebook reasserted its commitment to mobile at (quite literally) any cost, and Instagramming addicts have threatened to jump ship. But for all the business implications and user reactions seen so far, what this acquisition concretely means for the Facebook and Instagram experience is exposure for both parties to each others audience.
But now there is a glimpse of how the platform might integrate with the Facebook Timeline. You may have noticed that Instagram is currently missing from the roster of official Timeline apps, which is somewhat surprising. Names like Spotify, Pinterest, LivingSocial, and Foursquare are there – why not another incredibly popular service? In fact, there isn’t any sort of Instagram app available for Facebook. Aside to being able to push your photos to the site, the two have had very little to do with one another. Up until now, this is what your Instagram to Facebook content looked like:
According to InsideFacebook, a tight integration between the two has been in the works for awhile. Facebook told the site.
“We’re currently working with a small set of partners to text extending the publish_stream permission to include the Open Graph publish_actions permissions to enable apps to publish to Timeline.”
To put that in clearer terms, you’ve always been able to post your Instagrams to Facebook (see above). But now, they will include an action (“Molly took a photo with Instagram”) as well as the activity box you see from other apps summarizing your content from a particular integrated service. Here’s how it will look (via InsideFacebook):
This is all within the bounds of how current Timeline-approved apps work. And now that Facebook owns the immensely popular photo platform, it has all the more reason to introduce it to Timeline and drive traffic to the app.
This is only skimming the surface of what we’re likely to see from the deal. Other possibilities include filters for Facebook’s mobile app, mass importing your Instagrams to Facebook, and the ability to tag your Facebook friends in Instagram images. But for now, the only sure thing is that Instagram is $1 billion richer and integration with Timeline will hit very soon.
Courtesy of an article dated April 9, 2012 appearing in The Wall Street Journal and an article dated April 10, 2012 appearing in The Wall Street Journal and an article dated April 10, 2012 appearing in Digital Trends